Thursday, February 19, 2009

Facebook, Twitter and the Legion of Freeloaders

Just for a moment, let’s put aside the management philosophies, growth strategies, corporate positioning, and equity and debt structures. When it comes down to it, success and longevity in business is kindergarten simple: your revenue must consistently exceed your expenses.

If it doesn’t, the day will eventually come when you run out of money. In corporate speak this is referred to as a liquidity crisis.

Auto makers like GM and Chrysler are current examples, as are retailers such as Circuit City and Linens n’ Things. However, at least these companies generate revenue. It may not be enough, but they have customers who write checks or slap down credit cards.

We can’t say the same thing for Web 2.0 darlings Facebook and Twitter. Each has become an integral part of my life and provide me (and millions others) with measurable professional and personal value.

Yet, every time either of these companies whisper about establishing a revenue-generating business model their respective users threaten revolt. (Notice that I referred to us as users, rather than customers.)

For instance, earlier this month Twitter co-founder Biz Stone hinted that the company is evaluating whether to charge corporate users of the service. Stone cited Dell as a prime candidate, referencing the $1M in sales the computer maker reportedly generated from Twitter during the holiday season.

The resulting cry of shock and outrage by inhabitants of Twitterville forced the company to quickly backpedal.

Big…big…mistake. I want to know when management at Facebook and Twitter are going to stand up to the legion of freeloaders that use their service. Advertising revenue alone is simply not going to be enough. These companies need to develop multiple sources of revenue and that means converting users into customers by making them pay.

If some don’t like it and turn their back on the company, then so be it. There will be enough of us who are willing to fork over some dollars because Facebook and Twitter make our lives better.

Right now, it’s the private equity investors who are covering the tab for all of us. One of these days the VC gravy train is going to end.

19 comments:

Anonymous said...

Wishful thinking, bro. Just because they have money invested in them doesn't mean that we owe money back. I don't owe them anything because I'm already contributing the (only) value in the service, that is, my data, pictures, etc.

Now, if it were to turn into some sort of fully open service where we were actually free to do whatever we want, I might shoot it some money. (Like I did to Mozilla Firefox. I am free to change it too my heart's content)

Workpost Foreman said...

It's the Internet. People want it now and they want it for free. And recent VC-backed web companies have been happy to give it away.

Investors are betting there's a huge pot 'o gold to be found at the end of the freemium rainbow (when, maybe, there's a more modest but still quite large pile of money waiting to be claimed there).

Facebook, Twitter, Myspace, YouTube, Digg etc. - these web 2.0 companies are making money (or, at least, creating value), it's just not enough to sustain the massive businesses they are attempting to build.

Does Digg really need to have hundreds of employees? Does Facebook need to have thousands of employees? Are any of these companies really capable of becoming the next Microsoft?

Anonymous said...

This is probably the dumbest comment I have ever seen posted here. The Internet is about users not what companies want to put on the site and is a pull channel. The fact that both Facebook and Twitter were started without a business plan on how to make money is the issue. Users control content and through their numbers they have the power. If Facebook or Twitter charged people would leave their service in droves, especially in this economy

Brian Sullivan said...

Legion is a correct term. If theses services begin to charge, there will now be a legion of upset users looking for the same type of free service somewhere else. It will create opporunity for some up and comer to provide what they are looking for and would be quite happy with the "Small" amount of advertising revenue that they will generate.

yes it will be great if these companies get more money to work with to make the service they provide better, but on basic principal the people who patronize the site as a mojority, view it as a luxury and not a necessity. Charge just $.50 a month and there would be a SIGNIFIGANT drop off of users. People just don't like having to pull out their credit card.

Perhaps to create more revenue they should create "Premium Features" Allowing cooler gadgets, or enhanced features to users who pay a small fee. Rather than turning people away at the gates, let people show up, and then see all the great things they could spend their money on once they are already there!

-Brian Sullivan
www.YORhealth.com

Dr Adam said...

Walter Isaacson and Jon Stewart had a similar discussion about free content on the web and how they should go about starting to charge for content that has already been free from the beginning. This post sounds a lot like what Walter Isaacson said on the Daily Show with Jon Stewart not too long ago. Pretty good stuff.

http://www.thedailyshow.com/video/index.jhtml?videoId=217707&title=walter-isaacson

Personally, as a user and not investor of those online sites, I prefer that they make their money from the ads and let it stay free for us. If they need to come up with new ideas for increasing revenue then so be it but let us keep the services free. Otherwise I, like many others, will jump ship and go to the ones that are still free.

Andy said...

well I'll past here what i wrote on linkedin 'cause i'm out of time to write more, but that's what I think:

Monetize social networks is indeed a great matter to discuss, but i'm not sure if i'm willing to stay in some of them if i have to pay directly for it.

and know how to make money in the "social networks" as a business is really a great challenge, but there are some ways out there as FLICKR did.

I heard once a purposal for charging just the "heavy" users (with a lot of followers on twitter for example), who could earn something valuable as influence or contacts for spreadding ideas, infos, advertising or something worthful, but at the same time i wonder, what would be the criteria? and that makes me not to like it in these terms.

Indeed, i'm not sure if, even in another terms, direct users charging would be a good way or if people would wanto to use them.

And pepole using web communities are what make them exist

Andy said...

I guess internet is not a package like triple-play cable, it's made for thousands of different and independent innitiatives.

Flickr is from Yahoo, Twitter and Facebook not, last.fm from audioscrobber, youtube is from Google, and in other regions like Brazil we use social networks totally different of those most used in US or India for example.

Aggregate a "paying plan" for them (or for any other triple or multiple combination) is stablishing uncontrolable thousands of commercial deals and at the same time deny others, including the new smal and incipent innitiatives (like brazillian "we heart it" - in my oppinion lotta more better tha ffffound) and from other places (we are thinking worldwide)

I'm not saying it's not fair to pay, but maybe not directly.

Shoppings for example are public-private places, and we do not pay to come in, pass by and just look, or even use the toilet, but we pay for the whole structure if and when we buy something in a store inside it. (it's clear that is not everyone who's passing by a shopping will always buy something)

I think some sorts of advertising are the same in web-based free services, it's an indirect price we pay to have it.

John Matthews said...

We pay for our telephone service (a social networking tool of sorts), we pay for our mobile service, we pay for our cable service. Why shouldn't we pay for other services like Twitter, Facebook, Flickr. Am I jumping up and down at the prospect of paying something to continue to use these services. not at all but perhaps we need to be realistic in that these businesses, and they are businesses not non-profits or charities, have to pay bills, pay their employees, invest in R^D to create event better services and generally cover their costs and make a profit. Maybe there is an opportunity for a triple play package bundling Twitter, Facebook, and Flikr - just a thought. OK a lot of people would flee these services if they had to pay something for them even a nominal fee but I guess that just indicates those people value their cable or satellite or mobile or telephone service a lot more than they value Twitter or Facebook or Flickr et al. We will even pay $1 or so for iPhone apps even though it seems for some people deciding to pay the dollar or not is the hardest decision they have ever had to make. I hope not because that would be very scary. Seriously if you are lucky enough to have a job right now in many cases that is because someone values the product or service you or your employer provides and is willing to pay for it.

However, the other side of the coin is that I am sure a lot of media and advertising executives would be very happy if free was no longer free and as a result the millions fled from new and social media and free content. Social media would no longer be quite so social and such a cheap media channel for advertisers large and small and one which is seriously and in some cases fatally wounding big name advertising and media services companies. What is good news for advertisers is not always good news for advertising and media services companies who have perhaps had too easy for too long. Irrespective of the poor economy perhaps we should also reflect on all the jobs that are being lost in media and advertising because of free and cheap media and which are being replaced by such few jobs. OK this is a perception and it would be interesting to see some real statistics on job losses or job gains resulting from the changing media and advertising ecosystems resulting from free and user generated media and content.

John McTigue said...

Good discussion. I'm reposting a comment I made on your Linked-in discussion.

I guess you guys have missed the point of the founders of all these Internet buzz companies. The idea is not to create or produce anything - it's just to create BUZZ. How do they make money? Eventually they get so big that they either have to go public or someone has to buy them out. Most of them never have a dime in real revenues. Gotta hand it to them - brilliant! But of course 99.9% go down in flames.

Edward Barrera said...

Marc,
Facebook can make a $1 billion a year starting today if it splashed ads all over the place.
Twitter, I'm afraid, will be absorbed into something bigger (ala Facebook's attempt) or made into an internal/external corporate tool.
I won't pay for either.
They are a luxury, albeit fun ones. They start charging and, as others have said, the people will flee elsewhere.
What they are doing is not rocket science, they were just smarter than the next guy. And there is always a next guy/gal.

Steve Semler said...

If some is good enough that it becomes indispensible, it is possible for it reach a sort of "critical mass" where people would be willing to pay a small fee to continue using it. The benefit of changing the model would have to exceed the pain it would cause. For these services, IMO, that would mean that the Facebook or Twitter brand is so useful that people would pay for what it brings, rather than go to the next VC-funded service that is almost as good.

The economics of the business Marc mentions are sound--they need to bring in more revenue than they expend--so the question is whether there are streams of revenue besides fees to continue the support. Print media has faced this for a while and is losing its battle--not much innovation there, it seems. That may be the "next big innovation" in Web 2.0 services.

Karen R. Mager said...

This is such a complex issue I hardly know where to start.

Consider FB, Twit, etc., compaired to CBS, NBC, ABC. Advertisers have always foot the bill and consumers have never paid for their basic network programming.

Along came cable ... subscriber service, less ads (in theory)subscriber revenues augment or provide an additional revenue stream. Cable did not eliminate the FREE network service to the masses .. it offered an option.

Along came Social Networking sites.. unfortunately the creators were short sighted and developed robust FREE services. Imagine free (to the consumer) cable television, complete with HBO, CNN et al. Cable programmers would would be hard pressed to backpeddle without additional value to the consumer. Cable providers developed a subscribe for services business model from the beginning.

Services such as LinkedIn and Classmates charge for premium services - AND did not enjoy the percentage of growth that FB did last year. The question is, did BF advertising revenue pace with the user growth? Apparently not if FB is claiming fowl to the users who made money on their site.

Finally, content is the golden egg. Users provide content, traffic is generated, egg hatched. If the geeks at FB, Twit, et al can't develop a business model to monitize their traffic versus whinning about Dell making money, too bad. Brilliant concept, poor planning. They need to hire an adult to capture what's right under their nose - can you say Google?

Mike said...

I predict the "Great Shakeout of 2010" will virtually eliminate all but the strongest social media sites. The survivors will get millions of new users and will boom as businesses.

- Mike Johansson
www.fixitology.com
Twitter: mikefixs

Ron Callari said...

To date, Biz Stone and his cronies at Twitter have flatly denied that they will charge individuals and/or corporate accounts for their presence on their site; but, that they are aggressively pursuing alternate revenue-generating avenues. For more insight, please read: http://inventorspot.com/articles/twitter_vs_facebook_battle_social_goliaths_23419

dwcwiak said...

This is an interesting topic. I just got done speaking with 200 college students about the web and what their expectations are. An overwhelming number of them said that they want music, video, film, and social networking to remain completely free with no advertising. When asked about how the artist creating the content should be compensated they had no answer. And with the economic down turn they'd even like more stuff for free.
Is social networking the next internet bubble? I don't know, but a lot of sociologists sure think so.

Anonymous said...

If these social networking sites are looking for a new revenue stream, they can create premium user accounts and offer special services which would not be available to the free users. Websites, like the one you are on, LinkedIn, offer that very option. Therefore, the social or profession networking site is free to the masses, but an extended service account would be available for a fee.

Anonymous said...

The way around this for somebody like FB is to create an alternate brand which is strictly a paid subscriber service. Akin to a country club on the web. There is always going to be room for people who want exclusivity and are willing to pay for their status. Add premium features not found on their free site. Decide in advance how to leverage a more affluent level of user for alternate revenue streams. Even use FB as an entry portal to get them to the other site.

I think the key to avoiding negative blowback is to develop a completely different identity for the fee-based site.

Karen Post said...

All good points. Free is a complex concept that continues to help and hinder business on many levels. For a marketing perceptive read my article at http://www.oddpodz.com/articles/index.php. My site just started aggregating the best in free tools and services for business.

Marc Hausman said...

Thanks to everyone for their thoughts on this issue. I've tried to message each of you directly in response to your comment.

The general consensus is that Facebook and Twitter would be foolish to try to charge users. It would lead to such a decline in participants in their respective communities that it would damage their business in several ways:

1. The revenue they generate would be only a near-term gain. As users left, the value of participating in the community would decline resulting in more users taking flight.

2. Competitive, free services with comparable functionality would spring up quickly and fill the void.

3. Facebook and Twitter's overall valuation is driven by the size and dept of its community, rather than the functionality of its platform. As such, neither company should do anything to negatively impact community.

The suggested business model that I believe to be most viable is the creation of premium services that Facebook and Twitter users could elect to pay for. The current functionality would still be free to users.

Of course, that requires each company to continue to innovate with the functionality it delivers from its platform. That could be a good thing for all parties involved.